Effects of ASEAN free trade area (AFTA) on intra regional trade flows evidence from automotive industry

VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY LE MINH PHUONG EFFECTS OF ASEAN FREE TRADE AREA (AFTA) ON INTRA-REGIONAL TRADE FLOWS: EVIDENCE FROM AUTOMOTIVE INDUSTRY MASTER'S THESIS ………………… Master Program in Public Policy Hanoi, 2020 VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY LE MINH PHUONG EFFECTS OF ASEAN FREE TRADE AREA (AFTA) ON INTRA-REGIONAL TRADE FLOWS: EVIDENCE FROM AUTOMOTIVE INDUSTRY MAJOR: MASTER OF PUBLIC POLICY CODE: PILOT RESEARCH SUPERVISOR: Assistant Prof TRAN LAM ANH DUONG Associate Prof NGUYEN THI MINH Hanoi, 2020 ACKNOWLEDGEMENTS The writing of a master’s thesis is not a comfortable task So far, the biggest accomplishment in my life is complete it And, I would like to grab this chance to express my immense thankfulness to all those persons who gave me their invaluable support and assistance Above all, I am greatly indebted to my supervisors, Assistant Professor Tran Lam Anh Duong who was very willing with her time and knowledge She supported me from the first steps of the research process Not only instructing, but she also studied with me from theory to analytical practice And, Associate Professor Nguyen Thi Minh who gave me valuable suggestions to help me overcome the most difficult periods Without their advice, I would definitely have ended up in chaos I would include those who helped me in finding data - Mrs Nguyen Thi Xuan Thuy from the Viet Nam Industry Agency (Ministry of Industry and Trade, Vietnam) and Dr Dang Quang Vinh from the Master’s program in Public Policy of Viet Nam Japan University who assisted me during the final procedure Especially, I am grateful to all other lecturers Dr Thuy Anh, Prof Naohisa Okamoto, Dr Vu Hoang Linh who gave me helpful comments during one year of preparation for the thesis It is also appropriate to thank, MPP program assistants Ms Ha and Ms Huong and staffs from the Office of Global Initiatives at the University of Tsukuba for supporting me during two years studying at VJU and to undergo the memorable threemonth internship in Japan Last but not least, special thanks are reserved for my family and my friends for their tireless efforts and spiritual support After all, I take full responsibility for any flaws, errors and omissions This thesis is dedicated to the memory of my father TABLE OF CONTENTS ACKNOWLEDGEMENTS LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS CHAPTER 1: INTRODUCTION 1.1 Background 1.1.1 AFTA overview 1.1.2 ASEAN economics and trade 1.1.3 ASEAN automotive industry 1.2 Definition 1.3 Research objectives and research questions 1.4 Hypotheses 1.5 Method and methodology CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical framework of gravity model 2.2 Effects of AFTA on intra-regional trade flows at aggrega 2.3 Effects of AFTA on intra-regional trade at disaggregated CHAPTER 3: DATA AND METHOD 3.1 The estimation methodology and model specification 3.1.1 The estimation methodology 3.1.2 Model specification 3.3 Data description 3.4 The estimation method and common issues of panel dat estimation 3.5 Data processing CHAPTER 4: FINDINGS 4.1 Estimation results of trade creation and trade diversion e 4.1.1 Export flows 4.1.2 Import flows 4.2 Estimation results of trade creation effect by tariff elimin 4.2.1 Export flows 4.2.2 Import flows 4.3 Trade creation effect by tariff elimination by individual CHAPTER 5: CONCLUSION 48 5.1 Research summary 48 5.2 Policy implication 49 5.3 Limitations of the thesis 50 5.4 Further research 50 REFERENCES 51 Appendix Average tariff under CEPT Scheme from 1993 to 2015 .55 Appendix ASEAN Countries code table 57 Appendix Regional trade agreements – AFTA and AFTA-plus-FTAs 58 Appendix Summary Statistic 59 Appendix The effects of AFTA on export trade flows by PPMLHDFE .61 Appendix The effects of AFTA on import trade flows by PPMLHDFE .62 LIST OF TABLES Table 1.1: Share of total trade on GDP (%) of ASEAN countries, 1993-2018 .3 Table 1.2: ASEAN-5 motor vehicle production (in units), 2006-2018 Table 1.3: ASEAN-7 motor vehicle sales (in units), 2006-2018 Table 1.4: List of ASEAN countries by GDP (PPP) per capita ranked by the World Bank (2018) 13 Table 2.1: The estimated coefficients of AFTA dummies from existing studies…….22 Table 3.1: Possible outcomes of trade effects in an AFTA 30 Table 3.2: Hypotheses of the estimated coefficients 30 Table 3.3: The availability of bilateral trade flows from UN Comtrade 32 Table 3.4: Description of multiple fixed effects models 36 Table 4.1: The effects of AFTA on export trade flows by REGHDFE .39 Table 4.2: The effects of AFTA on import trade flows by REGHDFE .40 Table 4.3: Trade creation effect by tariff elimination – Export flow by PPMLHDFE method 42 Table 4.4: Trade creation effect by tariff elimination – Import flow by PPMLHDFE method 43 Table 4.5: Estimation results of trade creation effect by tariff elimination 44 Table 4.6: Estimation results with country dummy – Export flow 46 Table 4.7: Estimation results with country dummy – Import flow 47 Table 5.1: Summary of trade creation and trade diversion effects .48 LIST OF FIGURES Figure 1.1: Real GDP growth (annual %) of ASEAN region, 1980-2020 Figure 1.2: Total value of exports and imports of goods and services in ASEAN, 20002017 (in US$ billion) Figure 1.3: Trend of ASEAN total trade, extra-ASEAN trade and intra-ASEAN trade, 1993-2013 Figure 1.4: Share of export values of goods by intra-ASEAN and its major trading partners (%), 2000-2017 Figure 1.5: Shares of export and import value of goods by ASEAN country, 2000-2017 (%) Figure 1.6: Trend of intra- and extra-ASEAN export of priority integration sector of automotive products, 1993-2013 Figure 1.7: Total automotive export and import value in ASEAN countries, 1993-2018 (in US$ million) ACFTA AEC AFTA AIFTA AJCEP AKFTA APTA ASEAN ATIGA CBU CEPT CIA CKD CLMV EL FDI FEM FTA GVC HMR HS IL MFN MNEs NTBs NTMs Non-Tariff Measures PPML Poisson pseudo-maximum likelihood PPP Purchasing Power Parity PTA Preferential Trade Agreement SL Sensitive List TL Temporary Exclusion List REM Random Effect Model WDI World Development Indicators WTO World Trade Organization ZIPPML Zero-inflated PPML CHAPTER 1: INTRODUCTION 1.1 Background 1.1.1 AFTA overview The Association of Southeast Asian Nations (ASEAN) was established in 1967 with original members, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand Currently, the association consists of 10 member states, as successively Brunei Darussalam, Vietnam, Laos, Myanmar (Burma) and Cambodia In October 2003, ASEAN leaders decided to create a single market for a huge economy of US$722 billion and nearly 550 million people (2003) The building of the ASEAN Economic Community (AEC) by the end of 2015 is a major milestone of integration effort attempted in the developing world, offering variety of opportunities for each member states to attract inward Foreign Direct Investment (FDI) and increase trade flows AEC has been considered as successor following the completion of the ASEAN Free Trade Area (AFTA), which was signed in 1992 in Singapore by original ASEAN countries At that time, the AFTA agreement aimed to eliminate the tariff on a wide range of products between ASEAN members The establishment of AFTA has attracted the remaining members, Vietnam has been joined since 1995, Laos and Myanmar (1997), Cambodia (1999) Under the Common Effective Preferential Tariff (CEPT) Scheme, the products are firstly classified into two different groups depending on the willingness of each member - Inclusion List (IL) and Exclusion List (EL) Those product under IL were subject to removal of tariff to between 0% and 5% by 2008 for original AFTA members Later on, the tariff reduction schedule was revised several times Finally, the end year of IL was moved to 2002 The EL was later devided into a Temporary Exclusion List (TL) and Sensitive List (SL) Those products in TL would be shifted to IL in the future Whereas, additional time for both IL and TL were given to the newer member countries, namely Cambodia, Laos, Myanmar and Vietnam (CLMV) to implement their private routine of tariff reduction for products which originate from within AFTA members In addition, nontariff measures (NTMs) or non-tariff barriers (NTBs) were excluded under the CEPT scheme However, since 2010 the ASEAN Trade in Goods Agreement (ATIGA) has come into effect to enhance and supersede the CEPT/AFTA with greater goal ambiguity covering both tariff and non-tariff elimination same of signing ATIGA lead to intra-regional trade flows of automotive industry is not much high as expected Moreover, ASEAN countries such as Singapore, Thailand has participated in a lots FTAs with one other country in the world All of that might reduce the effectiveness of AFTA and ATIGA when large economies in ASEAN not only consider ASEAN is a potential market Therefore, the selection of any agreements of ASEAN countries should take into consideration the impact of joining that agreement on a specific industry On the other hand, AFTA-plus-FTA such as AANZFTA, ACFTA, AIFTA, AJCEPT, AKFTA is expected playing an important role in the process of forming the automobile industry of ASEAN including expansion the potential market for ASEAN’s automobile, reducing the transportation costs of automobile’s parts and components between neighboring countries in Asia Pacific area 5.3 Limitations of the thesis The availability of data is the most important thing that every empirical researcher must be considered before choosing the topic In this study, the data for non-tariff measures or nontariff barriers is not available in the period 1993-2018 for all ASEAN countries to control the effects of these important explanatory variables So the first limitation of this research is ignore the effects of NTMs and NTBs This study use U.S dollar index to convert the current trade value from the UN Comtrade to real trade value There seems to be no any appropriate existing price indexes to this task Another limitation of this thesis is applying a pooled data in 26 years for different analyses instead of or 5-year interval 5.4 Further research The study has applied the most recent techniques PPMLHDFE and REGHDFE in STATA to deal with issues of gravity model in statistics However, these estimators can be improved in the further research for example with a full syntax for absorbed variables On the other hand, at disaggregated data level HMR model seems to be an alternative useful estimator which is focusing on the entry’s cost and firm’s decision to export or import The application of this model require more research time 50 REFERENCES Anderson, James E 1979 “A Theoretical Foundation for the Gravity Equation.” The American Economic Review 69(1):106–16 Anderson, James E 2011 “The Gravity Model.” Annual Review of Economics 3(1):133– 160 Anderson, James E., and Eric Van Wincoop 2003 “Gravity with Gravitas: A Solution to the Border Puzzle.” The American Economic Review 93(1):170–192 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55 56 Appendix ASEAN Countries code table Country Code 96 116 360 418 458 104 608 702 764 704 Source: unstats.un.org 57 Appendix Regional trade agreements – AFTA and AFTA-plus-FTAs 58 Appendix Summary Statistic Summary statistics – Export flows Ln(export flows) Ln(GDP)i Ln(GDP)j Ln(GDP percap)i Ln(GDP percap)j Ln(distance) Ln(area) Comon border Landlocked Island Common language Common colonizer Colony WTO FTA AFTAplus AFTA1 AFTA2 AFTA3 Tariff_reduction Note: Author’s calculations based on pooled samples 59 Summary statistics – Import flows Ln(import flows) Ln(GDP)i Ln(GDP)j Ln(GDP percap)i Ln(GDP percap)j Ln(distance) Ln(area) Comon border Landlocked Island Common language Common colonizer Colony WTO FTA AFTAplus AFTA1 AFTA2 AFTA3 Tariff_reduction Note: Author’s calculations based on pooled samples 60 Appendix The effects of AFTA on export trade flows by PPMLHDFE PPMLHDFE method Export flow Ln(GDP)i Ln(GDP)j Ln(GDP percap)i Ln(GDP percap)j Ln(Dist) Ln(Area) Common border Landlocked Island Common language Common colonizer Colony WTO FTA AFTAplus AFTA1 AFTA2 AFTA3 Constant Observations Pseudo R2 Prob> chi2 RESET test Source: Author’s calculations Note: Regressed by no-log real trade Robust standard errors (clustering by country-pairs) in parentheses *** p